NZ ComCom approves M2-Vocus merger

The New Zealand Commerce Commission has announced that it will not be opposing the merger of Vocus Communications and M2 Group in their bid to form the third-largest telecommunications provider in New Zealand and the fourth-largest in Australia, worth more than AU$3 billion.

According to the NZ consumer watchdog, the merger will not substantially lessen competition, as Vocus and M2 do not compete directly, and due to there being a number of other players in the affected markets.

"While both Vocus and M2 provide calling, broadband, and data services to residential and commercial customers, they are not close competitors for any of the services that they provide," said ComCom chairman Mark Berry.

"We also consider that strong competition will continue to be provided by Vodafone, Spark, and Chorus."

The ComCom also decided that the merger would not enable it to foreclose downstream competitors.

"Given the presence of Spark, Vodafone, and Chorus, which all have large backhaul networks, we did not consider that foreclosure would be likely," said Berry.

The NZ ComCom had earlier this month released its statement of preliminary issues, detailing the competition concerns it would consider in its decision.

The statement of preliminary issues, which had regard to New Zealand's Commerce Act 1986, stated that the commission would determine whether the merger would substantially lessen both existing and potential competition in the telecommunications industry, as well as whether it would countervail the market power of buyers.

The ComCom said it would be specifically considering whether the merged entity would raise its own prices, reduce quality, and raise rivals' costs.

"We will consider the extent to which Vocus and M2 compete for the provision of fixed-line voice and broadband to both residential and commercial customers, and the degree of competitive constraint other providers in the market would provide on the merged entity," the statement of preliminary issues said.

"We will also consider whether in the absence of the acquisition, either Vocus or M2 would be likely to expand their offering in the near future (either their targeted customer groups and/or the type of services offered), and whether any competitive constraint from this would be lost as a result of the proposed acquisition."

The ComCom said it would also debate whether the company would control the market on the sale of backhaul services once merged, and whether it would have the motivation to deny its rivals' access to wholesale broadband services.

"We will consider whether the proposed merger would change the merged entity's incentive to worsen terms for backhaul inputs to those buyers that compete with the merged entity in downstream markets, in particular residential and commercial broadband and voice services. This in turn could result in a substantial lessening of competition in those downstream markets."

Last month, the ComCom's Australian counterpart -- the Australian Competition and Consumer Commission (ACCC) -- announced that it would also not oppose the M2-Vocus merger.

According to the ACCC, the merger will be permitted to take place because the companies have "limited overlaps" in providing wholesale and retail fixed broadband services and datacentre services -- and even when they do overlap, they are focused on different customer segments, with Vocus targeting enterprise and government while M2 delivers services to residential and small business customers.

ACCC chairman Rod Sims said that the merger would also not reduce competition to a significant extent among telcos.

"The ACCC concluded that this was primarily a merger between two complementary businesses. Significantly, the merged firm will also face significant competition from Optus, Telstra, and TPG. This merger consolidates the fourth player in the market," Sims said.

The companies' Merger Implementation Agreement in September gained the support of both boards, with the companies forecasting combined revenues of AU$1.8 billion for FY16, as well as earnings before interest, tax, depreciation, and amortisation (EBITDA) of AU$370 million.

Occurring via an M2 scheme of arrangement, the merger would be scrip based, wherein M2 shareholders will be given 1.625 Vocus shares per M2 share.

M2 chief executive Geoff Horth will be appointed CEO of the combined entity, while founder and CEO of Vocus, James Spencely, will take the role of executive director.

"The merger of Vocus and M2 is a compelling opportunity for all shareholders," said David Spence, chairman of Vocus, in a statement.

"The businesses combine Vocus' telecommunications infrastructure and corporate customer base with M2's demonstrated expertise in the consumer and SME segments. The merger creates the 4th-largest vertically integrated telecommunications company in Australia, and the 3rd largest in New Zealand."

According to the companies, M2 and Vocus will fit together well, as they have similar values and objectives.

"M2 and Vocus are an excellent fit, being highly complementary and culturally aligned," said Craig Farrow, chairman of M2.

"Both have successful track records of creating substantial value for shareholders and, together, we will retain this focus. Our ability as a merged company to capture future growth opportunities in Australia and New Zealand will be significantly enhanced."

The combined entity would provide retail internet, retail electricity and gas, corporate and wholesale internet and VoIP, datacentre and cloud services, domestic and international bandwidth, and dark fibre.

M2, which operates telco providers Dodo, iPrimus, and Commander, as well as energy provider Engin, in February recorded an 8 percent rise in revenue for the six months to December 2014 to AU$546.2 million, EBITDA up 14 percent to AU$86.1 million, and net profit after tax up 25 percent, to AU$38.5 million.

Vocus also attained Federal Court approval in June to acquire Amcom, after the latter's shareholders voted in favour of the AU$1.2 billion takeover, despite TPG's efforts to block the deal.

M2 shareholders have yet to approve the deal, with a vote set to take place in early 2016.